The Monetary Authority of Singapore (MAS) is expected to keep its current monetary policy, based on a Bloomberg survey where 14 out of 19 economists anticipate no changes. A few, including some major financial firms, suggest potential easing could happen. Earlier this year, MAS made two policy cuts to boost growth. However, recent stronger-than-expected economic data indicates a possible pause. Recent reports show that Singapore avoided a technical recession, with steady performance in sectors like manufacturing, services exports, and construction helping the economy to recover.

Monetary Policy Tool

MAS primarily uses the exchange rate as its monetary policy tool instead of interest rates. They manage the Singapore dollar (SGD) against a basket of currencies from key trading partners, shaping the strength of the local currency. The Singapore dollar nominal effective exchange rate (S$NEER) measures currency value. MAS allows the S$NEER to fluctuate within a certain policy band, stepping in when it goes beyond those limits. This policy band has three adjustable parameters: – The slope, which controls how quickly the currency strengthens. – The level, which affects immediate adjustments to the S$NEER. – The width, which manages volatility in the S$NEER. These parameters are regularly reviewed. Given the consensus that the bank will keep its policy steady, we suggest focusing on range-bound trading and low volatility strategies. The outlook is stable, indicating no major changes for the Singapore dollar. This implies that selling options for premium may be a smarter choice than buying them in hopes of a large move. Recent economic figures support this view, showing Singapore’s economy grew 2.7% year-over-year in the third quarter, surpassing expectations. Additionally, core inflation dropped to 3.0% in September, easing the MAS’s need to tighten policy further. These balanced indicators provide a solid basis for the MAS to take a cautious approach.

Market Calm

The options market already reflects this calm period, with one-month implied volatility for the USD/SGD pair recently falling to a five-year low of about 4.5%. This suggests that market players do not expect significant currency swings soon. We should align our strategies accordingly by considering options like selling strangles, which can profit if the exchange rate remains stable within a forecast range. Historical data shows that after policy pauses, like in 2016, the S$NEER often trades within a narrow band for several quarters. This history supports the idea that low-volatility strategies may be successful in the coming weeks. Nevertheless, we must stay aware of external risks mentioned by the surveyed economists, which could cause an unexpected shift. Create your live VT Markets account and start trading now.

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